Small-Cap Standouts

 | Jun 20, 2012 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

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acom

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FB

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tngo

In many nascent market rallies, smaller stocks often set the pace. In the past several trading sessions, I've spotted numerous breakouts on my screens of small- and midcap names.

One of those is Israel-based Retalix (RTLX), which makes software that allows gas stations, convenience stores and other small retailers to manage inventory, fuel sales and sales channel data.

The stock corrected 19% between its April 30 high of $21.95 and its May 17 low of $17.77. It rallied gradually up the right side of its base to an intermediate high of $20.97 on June 8. As of Tuesday's close, Retalix was just pennies below that level.

If the market rally continues this week and the stock surpasses that level of resistance, it could offer a buy opportunity. This is an extremely thin stock, however, moving only 4,600 shares per day, putting it in the speculative category.

On the plus side, earnings growth has been accelerating for the past three quarters, with a year-over-year growth rate of 54% most recently, at $0.20 r share. Income is seen rising 5% this year, to $0.83 a share, and another 37% next year, to $1.14 a share. Revenue growth has also been trending higher.

Another small-cap mover is do-it-yourself genealogy research company Ancestry.com (ACOM). This is a volatile, high-beta stock.

It's still well-below its 52-week high, although more recent trends are strong. Ancestry.com has been trending along its five-day exponential moving average since June 4, closing above that trend line in every session since then. The stock is currently in buy range, below intermediate resistance at $28.99.

Many analysts view Ancestry.com as a potential acquisition target, citing Facebook (FB), Google (GOOG) and private-equity firms as possible buyers. While that could be possible, I don't buy stocks on that basis. Despite widely circulated rumors and speculation, some anticipated acquisition deals never actually come to pass; others take much longer than expected.

Ancestry.com has grown revenue at double-digit rates in every quarter over the past two years. Earnings have increased at double- or triple-digit rates during that time. Analysts see income growing at double-digit rates this year and next.

Another small-cap that popped up on my scans on Tuesday is Tangoe (TNGO), which makes software that helps business customers manage their telecom systems and other data. I was in this stock a few months ago, exiting with small gains. This has historically been a difficult stock to hold, as it tends toward large intraweek price swings.

While many stocks can be bought successfully after they clear previous price highs, Tangoe's history shows it should be entered at a lower price point. As it is currently holding above short- and medium-term moving averages, I consider this stock to be in buy range. Of course, if the young market uptrend fizzles in the next few sessions, that could pull the stock quickly out of range. As always, investors need to set stops at a comfortable level, using either a percentage decline or a moving-average to keep losses small.

Though I never buy a stock based solely on fundamentals, one factor I screen for is strong estimates. Analysts see Tangoe's earnings growing by 50% this year, to $0.42 a share. Next year, they are seen rising by another 33%, to $0.56 a share.

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